China’s Pipeline “Dream” in Myanmar

China’s Pipeline “Dream” in Myanmar


Rahul Jaybhay

China's grand strategic vision is best deciphered by deconstructing its 'project of the century' - the Belt and Road Initiative (BRI) - which seeks to achieve multiple objectives at one go. The primary objective remains to ensure its "security", with the utmost focus on the energy dimension instead of strategic or economic aspects. According to China's perspective, energy security is best served when supplies are directed through pipelines rather than the usual maritime sea route. This view is inspired by the fact that the US maintains a naval presence in the region, which during the crisis period, could interdict essential oil supplies, thereby putting China at a disadvantage. To overcome this obstacle, China has invested heavily in the pipeline infrastructure in Myanmar. Here I explicate the oil pipeline project in Myanmar, which delivers energy supplies to China, but with potential economic costs. Moreover, the increased security risk and domestic opposition to the initiative might put the project's intended objective into jeopardy.

The project involves the construction of 771 km of an oil pipeline, whose initial idea floated around in 2004, connecting Maday (Made) Island in kyaukpyu to Kunming city in China, which is the capital city of Yunnan province. The pipeline aims to offload the oil on the port and, through pipelines, transfer it to China, instead of traversing through Malacca Strait. The project faced many hurdles in its development and the problems still remain largely unsolved.

The pipeline construction was finished in 2015 but  operations began after two years of delays, in April 2017, due to disputes over terms of management. Moreover, the Myanmar government imposed an additional 5% tax on crude oil along with, already existing, transit fees and pipeline tariffs. Furthermore, as commented by PetroChina - which built the pipeline - the bureaucratic hurdles make business very unlikely in Myanmar. Also in March 2017, Reuters reported that the first supertanker carrying oil from Azerbaijan failed to receive "approval" of Myanmar's navy, given the cancellation of the import license at the last minute by authorities. Notwithstanding the fact that the project started pumping oil into the Chinese mainland, the problems of bureaucracy and the disagreements over terms of tariffs and revenues continue to impede the commercial viability of the project.

The rationale behind the construction of the $1.5 billion of the pipeline project is to bypass the pirate-infested and heavily trafficked Malacca strait, but such intent is heavily undermined due to the low delivery capacity of the pipeline, while also being economically costlier than the usual sea route. The pipeline aimed to deliver 22 million tons of crude oil per year to China, much less than its total oil imports, which for the year 2017-18, stood at 335.5 million tons. This means that only 8.19% of total imports pass through the pipelines, while the rest 80% must traverse the usual Malacca route.

Moreover, according to the calculations done by Bo Kong, an US-based analyst, oil imports through the pipeline will reduce to 3.4% of total imports in 2030, nearly half of the estimated oil delivery numbers in 2015. In addition to low delivery capacity, the cost of transferring oil is nearly double than the usual sea route. As pointed out by A Erikson, the costs of delivering oil to Yunnan province from the port in Myanmar will be around $4 per barrel. Thus, low delivery capacity and presence of higher costs would mean, much of the oil is directed through the strait, keeping China's original purpose to bypass the strait unresolved.

Many Chinese scholars exaggerate the possibility of interdiction, whose translation into reality, is highly uncertain. Since most of the Southeast Asian nations receive their imports alongside the strait, and blockade by the US would mean possible resistance by these states. Moreover, even if the movement is restricted across Malacca, oil tankers could be diverted through Lomba, Sunda, and other channels, with additional costs up to $1 or 2 per barrel.

Besides the issues discussed above, the most important concern for China is the security of the pipeline. The pipeline project is more vulnerable to sabotage and military interdiction, and the presence of non-state actors in Myanmar could make such a possibility a reality. The ethnic groups in Myanmar administer semi-autonomous regions like the Rakhine and the Shan state that harbor the oil pipeline. The periodic ethnic unrests make the region highly risky for business operations and investments.

Moreover, the early periods of 2017 witnessed the ethnic cleansing of Rohingya Muslims by extremist Buddhists in Rakhine state, which according to the Global times, have severely impacted the region constituting oil pipeline and Kyaukpyu port. Recently, the violence again erupted in the region but, this time between the Arakan Army, a Buddhist insurgent group demanding an independent "Rakhine" and the central government in Myanmar, which further raised concerns about the cost-effective operations in Myanmar.

The possibility of violence and ethnic unrest could deviate the foreign capital away from Myanmar to other countries, with possible repercussions for China's BRI. But such threats, have not deterred China from investing more, hence suggesting that China is willing to bear additional energy costs, but seems adamant to get energy supplies from secured sources, thus favors pipeline transfer over shipping via sea.

Despite security and economic problems facing the pipeline, it is important to highlight that the pipeline also suffers opposition from the domestic constituency in Myanmar. As observed by the Advisory Commission on the Rakhine State, local communities are at a significant risk which involves land seizures and environmental degradation due to pipeline construction projects. Locals have also opposed China's 70% stake on the Kyaukpyu port but failed to limit its control. Nevertheless, the central government in Myanmar neglected the domestic concerns and encouraged the project, as the government expects to receive an estimated revenue of $13 million per year. Such an approach is  labeled as "extractive" by the locals which caters to the needs of the foreign state while benefiting the central government but largely neglecting the wellbeing of locals.

To sum up, the pipeline project is one of the most ambitious projects undertaken within China's BRI scheme. The above analysis makes it clear that the project is not as economically sound as it is envisioned. Additionally, the ethnic unrest in Myanmar hampers the security of the pipeline, making business unattractive for the investors. Further, the domestic opposition will impose additional costs on the project. Thus, the project is likely to suffer more if these problems are not resolved in the foreseeable future.

Rahul Jaybhay is a Master’s student at the School of International Studies, Jawaharlal Nehru University, New Delhi.